Are Student Loans the Next Financial Bubble?

Over the past 15 years, Congress enacted a bevy of laws in an attempt to reform financial and disclosure legislation. From Sarbanes-Oxley to Dodd-Frank, the goals of such legislation include increased transparency, a boost in consumer protection and, of course, shirking the onset of another financial crisis.

But the outcome is far from perfect – as evidenced by Wells Fargo's ongoing scandals and the rise of unregulated shadow banking. With a new presidential administration keen to eliminate reforms that seek to rein in the excesses of the financial industry, watch for new economic risks to emerge in the next few years.

One of those risks is America’s mounting student debt, which is well over $1.4 trillion. According to MarketWatch, this figure rises at a rate of $2,726 a second.

In the wake of the global financial crisis of 2008, some commentators suggested forgiving some student debt as an attempt to relieve young workers and revitalize the middle class. But do not expect anything approaching that idea over the next four years. And now one student loan company, which has been sued in the past for its dubious business practices, has found itself in court again.

As Bloomberg reported, in response to a lawsuit from federal regulators, Navient Corp. made it clear that its overarching goal is getting borrowers to “cough up cash” for creditors like its biggest client, the U.S. Department of Education.

That is quite a turnaround for Navient and its CEO, Jack Remondi, who wrote last month that the company's goal was to help its 12 million customers, who make up over a quarter of the total number of Americans who are currently paying off their student loans.

It also seems to differ from Navient's agreement with the Education Department, which contracted with the company -- once a division of student lender Sallie Mae -- to help borrowers pay off their loans and settle their debts in a way that is feasible for individual debtors.

But in a lawsuit filed in January, the Consumer Financial Protection Bureau (CFPB) said the company has been “systematically and illegally failing borrowers at every stage of repayment.” The CFPB noted that since 2009, most student borrowers secured the right to repay their loans based on their current income so they could become more affordable.

But instead, the agency accused Navient of several violations, from providing bad information to the improper processing of payments. In a few words, the CFPB accused Navient of deception, exacerbating financial distress and obscuring the necessary information needed to help borrowers manage their payments.

The most alarming result, as explained by Bloomberg’s Shahien Nasiripour, is that rather than launching the necessary paperwork to refinance student loans so borrowers could make payments based on their income, Navient pushed them toward a path that was quicker for employees to set up. In many cases, debtors were steered toward forbearance plans, which often delayed their repayment. Such terms are more profitable for Navient, but the CFPB alleges that the result was another $4 billion in interest charges for borrowers.

As Remondi wrote of Navient on Medium last year, “Help is a phone call away.” That may have been true, but apparently that help was more beneficial for Navient’s ledger, even as the company claimed it was providing the best possible information to its customers.

Whether this lawsuit proceeds is an open question, as the CFPB is one agency that is a target of President Donald Trump’s for elimination. At the very least, the CFPB will see a huge decrease in funding – even though it has been responsible for almost $12 billion to 29 million consumers since its inception.

But many analysts suggest that crippling student loan debt could end up in a financial crisis on Trump’s watch.

In another example of things going south: At least 550,00 students signed on with a federal program that promised to pay off their education loans if they worked 10 years in a public service job, such as a public hospital or nonprofit. But as the New York Times and other publications reported last week, the Department of Education told some borrowers who are approaching the end of their 10-year commitment that they don't qualify for the program after all.

Critics accused the company servicing those loans, FedLoan Servicing, of failing to provide adequate transparency and clarity over what kind of jobs are covered by the debt forgiveness program. Many of those former students, who took lower-paying jobs in order to be relieved of saddling debt, could end up defaulting on their loans.

So, could student debt trigger another financial crisis? The raw numbers alone are worrisome. One commentator on Forbes estimated that the amount of student debt generated in the U.S. runs over $4,000 for every American citizen – and only 37 percent of student borrowers are on track to pay off their loans without any kind of assistance. Last year, Consumer Reports suggested this mounting debt is similar to the housing bubble that burst a decade ago.

Meanwhile, student loan debt continues to comprise a larger portion of the national debt, from 5.7 percent in 2007 to over 7 percent today.

The spike in student in debt is in part the result of a culture that insists young people score a college education if they are to “amount to anything” – even though plenty of trades and vocations pay much better after a two-year training program than what the holder of a four-year bachelor’s degree in American Studies or French Literature can earn upon graduating.

The average hourly wage for four-year degree holders has barely budged since 2000, but the quest for that degree has resulted in higher-education tuition costs increasing far more rapidly than the inflation rate – largely because universities are investing in administrators, along with campus bells and whistles, instead of faculty and classrooms. For-profit universities, which by some accounts wrack up a third of all higher-education debt, are also at fault for promising an easy path to high-paying jobs that often do not exist.

Some students are saying enough is enough, and want to reduce the costs of their education before they spiral into debt. The local university near my home, Fresno State, is laden with dilapidated classrooms desperate for repairs – but university administrators wanted a new $80 million student union instead. Students voted down that proposal by an almost 60 percent margin because they objected to an additional $400 in student fees to pay for the building.

More students across the country are also choosing to reject rising student tuition, not by on-campus activism, but by refusing to pay their loans. If this trend continues, Trump will have a huge headache to manage – and he alone cannot fix it.

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